If you're just getting started in real estate and need to build your confidence and knowledge before moving on (but still need to make some extra cash), I suggest you start with flipping contracts (house flipping).
By flipping houses, you'll be able to earn while you learn the ropes in real estate, and you don't have to worry about risk if you do it right.
What is house flipping? Very simply, it's contracting to buy a property, then selling your right to buy to a third person. And yes, it is perfectly legal in all states.
A "quick flip" example
Here's an example of how house flipping might work. You find a house that is run down and vacant; there's no for sale sign in the yard.
Through persistence and a little detective work, you locate the owner and negotiate a "risk-free" contract to buy the property at 50% below the after repaired value with a very low earnest money deposit ($10).
You contact an investor who rehabs houses in the area, offer to sell him the house for $3,000 more than your contract amount. When he agrees, you fill out a one-page "Assignment of Contract" form and get $500 in earnest money.
A few days later, the transaction closes at a title company or an attorney's office, and you get a check for $3,000 PLUS your $10 earnest money.
A word of caution . . .
You'll need to be very persistent--it's NOT always easy. Some months you may find two, three, or more houses you can flip. Other months you may not find any.
You'll constantly develop new leads. Some leads will work out; some won't. Some sellers will be very motivated, and some won't. But remember, that time has a way of changing everything. You must learn to stick with it, even when you are discouraged.
Where do you begin?
Start with the end in mind, so you'll know what to do after you find a motivated seller with a house you can buy well below market value. If you try to find the house first then figure out what to do with it, you're in for a nightmare.
The first thing you need to do is line up your real estate investment team. You'll need rehab investors to buy your contract, a title company to close the contract or perhaps an attorney. And the most important--a good contract or agreement. Let's go over each of these in a little more detail.
How to find investors who will buy your contract
Read newspaper ads. Look in the daily and weekly newspapers for the "We buy houses" ads. You may even have some billboards around town that say "We buy houses." Call each one of these ads and talk with the investor. Keep an information sheet on each investor.
Be honest and tell them that you are just starting out and will be looking for houses that need to be rehabbed. Ask if they would like to be contacted when you find one. I assure you they will all be very anxious for you to do the leg work for them.
You also need to find out where they want to buy houses and in what price range. Some will only work in certain areas and price ranges and others will say anywhere there is a deal! Ask if they are a cash buyer or if they will need some extra time to arrange financing.
Attend real estate investment club meetings. Another excellent source of buyers for the houses you find will be your local investment club. Most major metropolitan areas have at least one club that meets monthly. Join and attend every meeting.
The networking opportunities are endless. When you go to the meetings tell everyone what you are planning to do. Once again, collect names and information about people who are interested in buying houses.
Attend foreclosure auctions. Some investors hate to go out knocking on doors and dealing with emotional, distressed owners; they much prefer to buy at the foreclosure auction.
At most auctions, the property must be paid for with cash or a cashier's check within hours of the sale. What a wonderful opportunity for you to meet cash buyers for the houses you find.
Introduce yourself to the investors and hand out business cards. Tell them you find houses just like the ones sold at the auction and ask if they would be interested in being contacted when you find something. Again, find out where and what price range they buy in.
Ask for their business card and make notes on the back or take along a notebook. Make sure and do this either before or after the auction because the investors will be focused on bidding during the auction and won't appreciate distractions.
Keep telephone logs. Once word gets around that you flip contracts, you'll get weekly phone calls from investors asking if you have anything. Keep a log of who calls, these will be the first investors to contact when you have a deal.
How to find a good title company or attorney
Ask other investors who they recommend. This is where all that networking comes in handy. By building a good relationship with the investors you call from ads, meet at the investor clubs or at the auction, you'll develop a base of mentors that you can call anytime you need advice.
Don't abuse the privilege though. Rarely will you make friends with someone if you call them frequently and keep them on the phone for a long time. Keep your phone calls brief and to the point. Or better yet, take advantage of the time at the investor club meetings for your questions.
The agreement or contract
Once you find that elusive motivated seller and the right house at just the right price, you'll need a document to "tie up" or buy the house. A contract lets the seller know you're serious about buying their house and it provides written instructions for the title company. All real estate contracts must be in writing.
Now is NOT the time to get creative about contracts. I'd suggest you consult with an attorney to write your contract in your best interest. If you can't pay an attorney, the next best thing would be to start with your state's real estate commission contract then add or subtract a few key clauses.
Do NOT use a contract from the local office supply store--it will be too vague. You can get a real estate contract from a Realtor or at any title company. You may also be able to get a good contract through your local real estate investment club.
Whichever agreement or contract you use make sure to add a clause that protects YOUR interest and allows you a way out of the contract. An example is:
This contract is subject to inspection and approval of the property by buyer's partner.
If you cannot find a buyer for the contract, you notify the seller in writing that your partner did not approve the purchase of the house. Then you are no longer obligated to purchase the property. I'd suggest that you send the notice by certified mail.
Everything you and the seller agree to must be written in the contract or agreement. If it's not, the seller may develop a sudden case of amnesia.
If the property is vacant, I always ask the seller to provide me with a key or a combination to the lock box along with permission to enter the premises for estimating repairs and completing inspections.
You may even ask the seller to allow you to place a "For Sale" or "For Rent" sign in the yard prior to closing. Remember, whatever you agree to, put it in the contract.
It is essential that the contract does NOT have any clauses that would prevent you from assigning the contract. You could add a simple clause like, "Buyer may assign contract."
In House Flipping for Beginners (Part 2) we'll discuss where to find houses owned by motivated sellers, how to evaluate a transaction, and how to negotiate a deal that's good for all parties.
About the Author:
Jackie Lange is a private investor who specializes in flipping contracts. After studying what many of the national real estate educators teach about flipping and weeding out what works and what does not work for her, she has developed a system which has enabled her to flip more than 80 properties in 2 1/2 years. She is president of Texas Home Solutions, Inc. and Public Relations Coordinator for the Association of Independent Real Estate Owners (AIREO) in Dallas, Texas.